ATPB 313 ACCOUNTING THEORY AND PRACTICE SEM I 2013/2014 (updated July 2013)

TOPIC 6 (part B) RECOGNITION & MEASUREMENT

Learning Outcome
At the end of this lecture, students should be able to :
Explain the concepts, principles and issues associated with definition, recognition, and measurement of:

Assets

Liabilities

Revenue

Expenses

Assets & Liabilities

Assets: A resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity Liabilities: A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits

Definition

It is probable that any future economic benefits associated will flow to or from the entity The item has a cost or value that can be measured with reliability Recognition

Historical costs; Realisable value; Present value; Fair value Dealing with initial and subsequent measurement Measurements

Issues in the definition of assets

Issues in the definition of liabilities

Recognition of assets & liabilities

Reliance on the law

Past

Determination of economic substance of the transaction or events Ability to measure the value of liability Conservatism (prudence) principles

It is probable that any future economic benefits associated with the items will flow to or from the entity Key issue: what does probable mean?

Present (CF 4.38)

The item has a cost or value that can be measured with reliability IASB framework - reliable measurement is that which is free from material error and bias and provide faithful representation

Measurement of assets & liabilities

PP&E Inventory

Intangible Inv Property

Assets
Etc Defined Benefit Biological assets

Financial

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Measurement of assets & liabilities

8
ASSET TYPE MEASUREMENT AT INITIAL RECOGNITION Fair value MODEL BASED ON FAIR VALUE For specified financial assets and for particular business models: fair value Accounting policy choice: revaluation model Compare carrying amount to recoverable amount. Recoverable amount is greater of value in use and fair value less disposal costs (IAS 36) BASIS OF IMPAIRMENT TEST

IFRS 9 Financial Instruments

IAS 16 Property, Plant and Equipment

Purchase costs + construction costs + costs to bring to the location and condition necessary to be capable of operating in the manner intended by management.

IAS 38 Intangible Assets

Purchase costs + development costs + costs to bring to the location and condition necessary to be capable of operating as intended by management
Cost including transaction costs

Accounting policy choice: revaluation model

IAS 40 Investment Property IAS 41 Agriculture

Accounting policy choice: fair value Fair value less costs to sell

Fair value less costs to sell

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Measurement of assets & liabilities

Measurement of liabilities

Under IFRS as well as under Malaysian CF, the most commonly used measurement method for liabilities is historical cost (or modified historical cost)

Fair value: Used on initial measurement of transactions involving liabilities e.g. Recognition and Measurement of Financial Instruments (MFRS139) and Share-based Payments (MFRS2)

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Measurement of assets & liabilities Fair value hierarchy

10

Yes

Is there a quoted price in an active market for an identical asset or liability? (Level 1 input)

No

Use the Level 1 input = Level 1 measurement Must use without adjustment
* Maximise the use of relevant observable inputs. Observable inputs include market data (prices and other information) that is publicly available

Are there any observable inputs* other than quoted prices for an identical asset or liability?
Yes No

No use of significant unobservable (Level 3) inputs = Level 2 measurement

Unobservable inputs include the entitys own data (eg budgets, forecasts), which must be adjusted if market participants would use 10 different assumptions

Use of significant unobservable (Level 3) inputs = Level 3 measurement

Revenue - Definition

11

the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants MFRS 118 (7)

This definition focuses on inflows or other asset enhancements arising from an entitys ongoing major or central operations Revenue forms part of income that also include gains Behavioral view of revenue: - revenue = accomplishment - expense = effort Therefore, matching results in profit = net accomplishment
11

Revenue - Definition

12

For revenue to be recorded in the income statement, a point of recognition needs to be determined i.e.:
(a) Myers Based on when is the (b) Paton & Littleton Accrue throughout the earning process: critical event? - may varies depending on the - revenue exists because of something that the companies do nature of the business - e.g. manufacturing companies - companies have gone through the earning process vs. financial institution

12

Revenue Recognition & measurement

13

General recognition criteria

Measurability of asset value Existence of transaction Substantial completion of the earning process

Recognition criteria established in Malaysian/IASB CF

It is probable that any future economic benefits associated with the items will flow to or from the entity The item has a cost or value that can be measured with reliability

Recognition and measurement rules in MFRS 118/IAS118

Sale of good e.g. products are delivered or services are rendered
13

Rendering of services

Interest, royalties and dividends

Expenses
Definition

14

Decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants

Recognition criteria
It is probable that any future economic benefits associated with the items will flow to or from the entity The item has a cost or value that can be measured with reliability

Measurement: Matching concepts

Associating cause and effects
14

Systematic and rational allocation

Immediate recognition

Summary Topic 6 (Part B)

Definition : Assets, Liabilities, Revenue & Expenses

15

Recognition: criteria (CF): - It is probable that any future economic benefits associated with the items will flow to or from the entity - The item has a cost or value that can be measured with reliability

Measurement: - Assets & liabilities: Highlight the use of HCA, FVA, and revaluation model - Revenue: Highlighted in MFRS 118/IAS 188 - Expenses: Closely link to the 3 matching concepts i.e. associating cost & effect, systematic & rationale allocation, and immediate recognition
15

Tutorial questions Godfrey et al: - Problem 7.1 - Chapter 7: Questions 3 & 7 - Chapter 8: Questions 3 & 6 - Chapter 9: Questions 5 - Chapter 10: Question 5

16

16